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Morning NOTE

19 October 2022

GOOD MORNING

The ZAR trading lower after a Dollar rebound following another spike in Treasury yields.

SUMMARY

  • The Rand retreated to 18.1800, before recovering to 18.1100 ( at the open), following a Dollar rebound.
     
  • Stocks however closed higher in New York ,  on the back of better than expected earnings , creating a Risk on environment.
     
  • However the Yields (interest rates) markets continue to move higher as it fears a rampant FED and more rate hikes.
    • Against this back drop, the dollar index traded above 112 and remains well supported by expectations that the Fed will push ahead with its aggressive tightening plans to bring down inflation.
    • In the latest Fed commentary, Minneapolis Fed President Neel Kashkari said the central bank may need to lift its policy rate above 4.75% if “underlying” inflation continues to accelerate.
    • The dollar also continues to prevail as the safe-haven currency of choice amid a worsening global growth outlook.
       
  • The ZAR once again on the back foot in this environment.
    • As we’ve highlighted on many occasions, the long term trend of the ZAR will be determined by US interest rates.
    • And as long as it continues to rise, expect the ZAR to weaken.
       
  • Adding to weaker sentiment was a disastrous inflation print out of the UK this morning.
    • UK CPI printing at 10.1% YOY. Inflation returning to the 40-year high hit in July and surpassing market expectations of a 10% rate.
    • Major contributors remain soaring prices for electricity, gas, and fuels.
    • The annual core rate, which excludes energy, food, alcohol, and tobacco, rose to a record-high of 6.5% compared to expectations of 6.4%.
    • The UK 10YG yield at 3.94%.
       

Significant Market Data:

  • Wednesday
    • 08:00 UK INFLATION 10% EXPECTED VS 9.9% PREVIOUS YOY
    • 10H00 SA INFLATION 7.4% EXPECPTED 7.6% PREVIOUS
    • 13H00 SA RETAIL SALES 4% EXPECTED VS 8.6% PREVIOUS YOY
       
  • High risk event: 26 OCTOBER 2022: SA MEDIUM TERM BUDGET SPEECH.

Today:

  • The ZAR opening dramatically weaker this morning on the back of global inflationary pressures.
    • In the UK, inflation printed at 40 year highs, and the data overshadowing stronger than expected earnings out of the USA. 
       
  • And just like that, we once again focussing on the elephant in the room i.e.  INFLATION .
    • Fed SPEAKERS CONTINUE TO WARN MARKETS THAT THEY WILL CONTINUE TO RAISE RATES.
    • Resulting in RISK OFF START to the day.
       
  • Later this morning, we have SA inflation data, but any market reaction will now be muted following the UK’s CPI print.
     
  • Markets continue price for a higher Dollar with the Japanese Yen a few ticks off the 150 level.
     
  • Against this backdrop, expect a WEAKER ZAR, as yesterday’s good-will appears to be have been eroded.

Trade today : BUY USDZAR  (on dips towards 18.1200-18.1000), break of 18.2000 targets 18.3800

Expected Ranges

  • USDZAR :  Expect a range 17.9700-18.2100
    • Importers 18.0500-17.9700
    • Exporters 18.1300-18.2100
       
  • EURZAR :  Expect a range of 17.7100-17.9500
    • Importers 17.7900-17.7100
    • Exporters 17.8700-17.9500
       
  • GBPZAR :  Expect a range of 20.2800-20.7000
    • Importers 20.4200-20.2800
    • Exporters 20.5600-20.7000

OPENING RATES

  • USDZAR 18.1100
  • EURZAR 17.8200
  • GBPZAR 20.4700

SOUTH AFRICA

  • Mineral Resources and Energy Minister Gwede Mantashe has stressed that Africa’s growth and prosperity depended on solving the continent’s energy poverty.
    • Mantashe was one of the main speakers at the opening of the 2022 African Energy Week at the V&A Waterfront, in Cape Town on Tuesday.
    • Minister Mantashe quoted data saying about 600 million Africans, 43% of the continent’s population, did not have access to electricity. EWN
       
  • The DA said that President Ramaphosa’s withdrawal of perks like free water and electricity for Cabinet ministers was a victory for South Africans.
    • The party said that Ramaphosa was forced to accede to its demands by withdrawing amendments to the ministerial handbook.
    • The rule exempts Cabinet ministers from paying for water and electricity at their official residences. EWN
       
  • SA grey listed ?
  • What does it mean?
    • The word greylisting has been making some rounds in various prominent media outlets in recent times.
      • But what does greylisting mean? What economic impact will it have on South Africa’s economy? What will greylisting do?
        • According to the Paris-based Financial Action Task Force (FATF), a global body that oversees compliance with anti-money laundering and counter-terrorism financing measures.
        • South Africa was found to be partially compliant or noncompliant with 20 of FATF’s 40 recommendations.
           
  •  In spite of all this, the South African government is taking urgent attempts to avoid being greylisted by introducing amendments to the financial regulatory system.
    • Currently, there are bills (Anti-Greylisting bill) tabled before parliament and for public comment, that seeks to avert the country from being greylisted.
    • Assuming that these bills are signed into law before November 2022, South Africa might find itself off the hook. Moneyweb

GLOBAL MARKETS

  • On  Tuesday, the Dow added 1.12%, the S&P 500 up  1.14% and the Nasdaq gained 0.9%, with US shares higher for the second straight day. 
     
  • US stock futures also higher this morning, following a jump after Netflix spiked in late trading on better-than-expected results.
    • S&P 500 futures also gained 1%, while Dow futures were up 0.6%.
    • Netflix surged 14% in extended trading on an earnings and revenue beat, as well as strong subscriber growth.
       
    • Those moves came on the heels of a solid start to the corporate earnings season, though analysts are revising earnings projections lower due to recession concerns.
       
    • Downside risks from soaring inflation and aggressive monetary tightening also remain.
      • Investors now look ahead to more earnings reports on Wednesday from Tesla and IBM, among others, as well as US housing starts data and the Federal Reserve’s Beige Book.

Bonds:

  • The US 10YT yields, spiked above 4% following more hawkish FED comments.
    • In the latest Fed commentary, Minneapolis Fed President Neel Kashkari said the central bank may need to lift its policy rate above 4.75% if “underlying” inflation continues to accelerate.
       
  • The benchmark yield reaching the highest since October 2008 as investors were monitoring corporate earnings in the US for clues on the impact of high inflation rates and Fed tightening on the company profits.
    • Also, a series of hot inflation prints added to concerns that the Fed will continue to raise rates more aggressively despite a slowing economy.
    • Also, volatility is expected to remain elevated, with sharp moves in gilts sending shockwaves through other bond markets as investors awaited further clarity on the UK’s fiscal plan.
       
  • Earlier, UK inflation also printed at 10.1%, and coming in at 40 year highs, adding to a spike in UK treasury yields.

YESTERDAY

  • The Dow added 337 to 30,523
  • The SP500 added 42 to 3,719
  • The Nasdaq added 96 to 10,772

OVERNIGHT HEADLINES
 

  • Asian markets traded higher on the back of a bullish Wall street that closed higher following better than expected corporate earnings.
    • In Japan, the Nikkei 225 Index rose 0.37% to close at 27,257,and rising for the second straight session. The index helped by strong gains on Wall Street overnight driven by solid earnings reports.
      • Upbeat corporate outlooks for domestic firms also supported stocks, with a weakening yen set to boost the profits of export-heavy Japanese industries.
      • However, Japanese authorities ramped up verbal warnings against sharp yen declines, with the  Finance Minister indicating they are increasing the frequency of monitoring foreign-exchange markets.
      • Meanwhile, resource-related firms declined on weaker commodity prices.
    • In Australia, the ASX 200 Index edged up 0.31% to close at 6,800 on Wednesday, rising for the second straight session, with travel and consumer stocks leading the advance.
      • Still, market caution capped gains as downside risks from surging inflation, rising interest rates and slowing growth remain.
      • The travel sector led the market higher on an upbeat outlook for the group, with sector leader Qantas Airways jumping 2.2% to its highest levels since February 2020, before the pandemic lockdowns. Reuters
         
  • The US dollar, rose above 112 supported by expectations that the FED will continue with its  aggressive tightening plans to bring down inflation.
    • In the latest Fed commentary, Minneapolis Fed President Neel Kashkari said the central bank may need to lift its policy rate above 4.75% if “underlying” inflation continues to accelerate.
    • The dollar also continues to prevail as the safe-haven currency of choice amid a worsening global growth outlook.
    • The dollar held steady against the euro and the sterling, while hovering 32-year highs against the yen despite intervention risks.  Fx news
       
  • Crude oil moved higher and above $84/bl. It was rebounding from two-week lows as supply concerns continues to increase.
    • The EU’s latest sanctions on Russian crude threatened to undermine a planned release of emergency oil reserves by the US.
    • The EU would impose shipping restrictions on tankers transporting Russian crude above an agreed price threshold, forcing shipowners to adhere to the g7 agreement to cap the price of Russian oil.
      • also, the US is reportedly planning to release 15 million barrels of oil from its emergency reserves to bring down high gasoline prices, and may consider significantly more this winter.
    • Elsewhere, Malaysia defended an OPEC+ decision to reduce oil production following US accusations that Saudi Arabia coerced other nations to support the move.  Gulf Energy news
       
  • Gold prices fell near $1,640/oz, remaining under pressure from expectations that the FED  will continue raising interest rates aggressively to stamp out inflation.
    • In the latest Fed commentary, Minneapolis Fed President Neel Kashkari said the central bank may need to lift its policy rate above 4.75% if “underlying” inflation continues to accelerate.
    • Gold also continued to underperform as a safe-haven asset despite persistent inflationary pressures and mounting risks of a global recession.
    • In Russia, the central bank said it sees no need to increase gold holdings in its reserves amid pleas from gold miners for more state purchases as they grapple with Western sanctions. Kitco metals

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